TRA - Turners Automotive Group [previously TNR - Turners Limited]

[Snoopy]

Following on from my prior analysis of the bonds and what research Roger has done, I've found some time to give my opinion on the value of these beauties using the Black Scholes pricing model. Basically within a convertible bond you have a straight bond and a callable option which can be valued using your preferred option pricing model. The only tricky part with valuing convertible bonds are the different terms to which they get converted at - for this case its the lesser of $3.75 or a 5% discount to the 90-day VWAP, and the assumptions we use in discounting the bond's cash flows and valuing the option.

My assumptions are the following:
- TNR standard deviation - 7.94%
- Div. yield - 3.31%
- Risk free rate (taken from RBNZ) - 2.48%
- Default spread - 3.00% (Giving us a YTM of 5.48% on the straight bonds)

The current derived value of the callable option per bond turns out to be $0.060, with the value of the straight bond being $1.016 (ignoring the 9 days of accrued interest), giving us a current bond price of $1.076.

Important things to note; this value was assuming a current share price of $3.62, so as at today we use the 5% discount to the share price model. Also the risk free rate and default spread have the most significant effects on the valuation outcome, so adjust accordingly to what you think is best.

Fox, when I had the option of either taking TNR shares or TNRHB bonds (at the time my TNRHA bonds matured), I reckoned the 'prospective gross yield' for the TNR shares priced at $3 was more or less equal to the yield offered by acquiring TNRHB bonds at par value: 6.5%. Granted dividend yield changes as the capital value of the underlying share changes. But share price changes since that time don't support the dividend yield dropping to just 3.31%. Can you explain where this input figure comes from please?

TIA

SNOOPY

discl: hold TNR and TNRHB

[percy]

You forgot a word or two there there Percy... "fully imputed"

Like me to forget the most important part.
Thank you.

[Fox]

Fox, when I had the option of either taking TNR shares or TNRHB bonds (at the time my TNRHA bonds matured), I reckoned the 'prospective gross yield' for the TNR shares priced at $3 was more or less equal to the yield offered by acquiring TNRHB bonds at par value: 6.5%. Granted dividend yield changes as the capital value of the underlying share changes. But share price changes since that time don't support the dividend yield dropping to just 3.31%. Can you explain where this input figure comes from please?

TIA

SNOOPY

discl: hold TNR and TNRHB

Hi Snoops, the div yield I approximated of 3.31% comes from an annual total div of 12c taken at the current share price (12/362). Yes I would have to agree with you that it is probably a little conservative, but their dividend policy recently changed and we haven't got much to go off, so I assumed a quarterly payment of 3c. If we bump up the div yield to 4%, our call value drops from $0.060 down to $0.053, giving a current bond value of $1.070, but we have to be careful as the SP can often get ahead of itself and lead the dividend payments which would lower our yield - hence my conservative view.

[Beagle]

https://www.nzx.com/files/attachments/256590.pdf

[blackcap]

https://www.nzx.com/files/attachments/256590.pdf

I read it, looked good didn't it. I am surprised to see the SP still at 3.60 and would buy more if funds permit. Divs imputed now of 14 cents per annum (paid quarterly) and organic growth looking to boost the EPS to over 30. Low PE and good prospects. What is not to like.

[BlackPeter]

I read it, looked good didn't it. I am surprised to see the SP still at 3.60 and would buy more if funds permit. Divs imputed now of 14 cents per annum (paid quarterly) and organic growth looking to boost the EPS to over 30. Low PE and good prospects. What is not to like.

Noticed after reading the latest John Ryder newsletter (Global Investing) that he is shorting second hand car dealers in the US ... and he is more often right than wrong.

While I think that the situation in NZ is different (where the new car market is less of a competition), is it still possible that the depressed US second hand car market is impacting on sentiments over here as well ...

[blackcap]

Noticed after reading the latest John Ryder newsletter (Global Investing) that he is shorting second hand car dealers in the US ... and he is more often right than wrong.

.

You raise a good point there BP. I read his newsletter as well and I think last time he was short cars as well. I wonder though if TNR are somewhat insulted as well with their integrated model and the finance they provide. Although if they sell less cars they sell less finance so maybe there is something in that.

[percy]

Be careful with what happens in the US and thinking it will happen here.
Last big mistake I made a few years ago, was reading how well the likes of $2 shops were doing in the US, and expecting The Reject Shop in Aussie would be going gangbusters in Aussie.Reject shop then came out with a loss.
Then reading how well HB Hi-Fi and Harvey Norman were doing in Aussie,buying Smiths City, who then reported as usual,they were struggling.
Last result I read of new vehicle in NZ sales, they were another record.This flows onto used cars.

Nice to see the divie in my bank.!

[BlackPeter]

You raise a good point there BP. I read his newsletter as well and I think last time he was short cars as well. I wonder though if TNR are somewhat insulted as well with their integrated model and the finance they provide. Although if they sell less cars they sell less finance so maybe there is something in that.

Be careful with what happens in the US and thinking it will happen here.
Last big mistake I made a few years ago, was reading how well the likes of $2 shops were doing in the US, and expecting The Reject Shop in Aussie would be going gangbusters in Aussie.Reject shop then came out with a loss.
Then reading how well HB Hi-Fi and Harvey Norman were doing in Aussie,buying Smiths City, who then reported as usual,they were struggling.
Last result I read of new vehicle in NZ sales, they were another record.This flows onto used cars.

Nice to see the divie in my bank.!

Absolutely ... I didn't say that the situation with Turners in NZ is comparable to the second hand car dealerships in the US.

NZ has a much stronger second hand market with little competition from new car dealers - and TNR has a unique position in this market, not just as the only larger fish in a big pond with many many small fish, but as well as only player who can integrate car sales, finance and insurance.

I just said that our (stock-) market might feel the blues coming from the US ... which might be a good thing ... opportunity to buy more TNR for a lower price than normal ;

[Snoopy]

An excellent presentation.
Again a must read for any shareholder, or anyone looking to invest in TNR.
Would some kind person please post the link to it.

Here is a link to the latest presentation from 12th April 2017.

https://www.nzx.com/files/attachments/256590.pdf

I notice that these presentations do not seem to be archived on the Turners website. So to avert the risk of some valuable information disappearing into the ether here is some useful information from that presentation.

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NZ’s leading second hand car, truck and machinery retailer

• Turners is a “household name” with strong brand qualities and position in the market
• A clear multi-channel strategy with increasing focus on retail/end user sales
• Vehicles sold on behalf of owners (60%) and Turners - owned vehicles (40%) with average vehicle held for less than 45 days. (Buy Right Cars has a longer holding period due to its higher margin model)
• Provides the wider Turners group with access to a highly targeted customer base at source, to whom finance and insurance products can be sold
• Despite having the number one market position, Turners holds less than 10% share of highly fragmented used vehicle market
• Turners has recently completed the acquisition for Buy Right Cars to grow its bricks and mortar footprint and is also growing its online presence through initiatives such as Cartopia (new on-line only car store)
• Turners relationship with other car dealers allows it to identify high quality scale businesses it may wish to acquire
• 36,500 vehicle units or machinery items sold in FY16

Finance and Insurance

Reputable brands and businesses providing flexible finance and insurance solutions for personal and SME customers as well as to dealers and brokers

• Products include range of personal and commercial finance solutions; as well as mechanical breakdown and motor vehicle insurance, and life and other non-life insurance products
• Majority of lending is for motor vehicle loans to consumers (75%) arranged both directly and through dealers and brokers. The remainder is commercial lending for plant and equipment, property, working capital and leasing
• Combined finance book ledger approx. $176M ($143M March 15)
• Finance receivable funding is a mix of bank debt, securitisation and shareholder funding
• Now 8% shareholder in MTF – announced exclusive partnership with MTF to provide a non-recourse lending product to MTF’s network of franchisees and dealers (approx. 250).
• Approx. 50% of insurance policies sold direct through Turners Limited businesses, remainder through broker/dealer channels
• Increasing focus on cross - selling across the wider Turners group
• The link to origination transaction means less competition, long term relationship with customer, more control.
• 11,000 loans written in FY16
• 10,000 insurance contracts written in FY16

New Initiative: MTF Exclusoive Partnership

Exclusive partnership with Motor Trade Finance to provide non-recourse lending product

 2 year agreement with rights of renewal
 Reflects a long and valuable relationship between MTF and Turners (Turners owns 8% of MTF)
 Product will be offered through MTF network of 250 dealers, brokers and franchisees
 Introduction of a non-recourse product will provide dealers with a single portal for all both recourse and non-recourse financing, significantly improving convenience and processing times
 Estimate the partnership could deliver $50M+ in new lending over the next 2 years
 All loans are full secured and are eligible for Turner’s securitisation program.

Debt Management

EC Credit, a recognised leader in the debt collection and credit management industries
• Total debt management and credit control services for NZ and Australia customers
• Contingent debt collection (agency) model –EC Credit does not acquire books of bad debt using its balance sheet
• Experts in Terms of Trade documentation and implementation of best practice credit solutions
• Long term contracts with large corporates including banks, government departments, insurance and other sectors
• Total revenues split 60:40 between New Zealand and Australia
• Turners Finance and Insurance can refer its bad debt collection to EC Credit, however, the extent of this cross-sell opportunity is less than the other businesses in the Turners Group due to Turners' historically low bad debts
• Highly cash generative, very little capital to run and counter cyclical protection for group

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SNOOPY